Landed Costs in SAP Business ByDesign – Inbound Process (Moving average & capitalization)
This blog post is part of a series of related blog posts highlighting the enhancements to address the handling of landed costs. Link to main blog post.
This blog post shows a straightforward example of an inbound process with landed costs for a material with material valuation moving average and the landed costs being capitalized. Furthermore, we use the company currency throughout the process. In the examples, we will focus on one set of books only. For the sake of simplicity, taxes are not considered in this example.
The following scenario variants are not covered in this example. If you are interested in more details, please have a look at the following blog posts:
- Landed costs for a material with standard perpetual cost method
- Landed costs being expensed (instead of being capitalized)
- Landed costs in change processes, such as:
- Different currencies used in the purchase order, in the landed costs invoice and the company currency
- Further information regarding the taxes (deductible and non-deductible)
Process Description in Detail
- Planned landed costs in purchase orders
An inbound process starts with the creation of a purchase order. Here, you can assign planned landed costs in the Prices and Cost tab on either header or item level. It can be maintained by assigning a landed cost component and the calculation method, which is either ‘Percentage‘ or ‘Fixed value‘.
If you maintain landed costs on header level, they will be distributed to ‘To-Stock’ material items based on the item net value and its portion is displayed on the item level.
You can also directly assign several landed cost components on item level, including multiple lines for the same cost component.
In this blog post we provide a consistent example. We will use the purchase order with the landed cost component LC freight on header level with 500 USD distributed to material level:
- Material LC005 – 1000 USD Item net value
- Material LC003 – 4000 USD Item net value
The purchase order items are represented in financials after the purchase order has been ordered in the Inventory Valuation Work Center > Purchasing Documents Items view. Here, under the Account Assignment sub view, you see amongst others the Total Landed Cost. Furthermore, the landed cost components, landed cost categories and the assigned amount for each line item are displayed:
- Post goods receipt and inventory valuation
The goods receipt is handled as any other goods receipt in the warehouse. The postings in financials automatically consider the planned landed costs and update the material unit costs.
To illustrate the change in inventory, first we will take a look at the inventory valuation and the material unit costs before the posting of the goods receipt:
|Quantity||Total Amount||Material Unit Cost|
|LC005||10 ea||1.000 USD||100 USD /ea|
|LC003||20 ea||4.000 USD||200 USD /ea|
Now, the quantities are received as they were ordered:
The material net value and the landed cost amount (which is to be capitalized) that have been planned in the purchase order are posted on the debit side of the inventory account. Simultaneously, the inventory unit cost amount of the material will be updated with this posting. The lines of the offset posting are split. On the one hand, the material net value of the procured materials is posted on the regular Unbilled Payables account. On the other hand, the landed cost amounts are posted on dedicated clearing accounts by landed cost category LC Unbilled Payables (Freight):
Furthermore, for these clearing accounts, a Landed Cost Clearing Set has been created, based on the following concept:
Like the known Goods Receipt/Invoice Receipt clearing set, there are now additional clearing sets for landed costs. They will be created for each inbound delivery item for which a landed cost component has been planned. These clearing sets serve to connect later on the inbound delivery item to the invoiced landed costs and finally to balance all landed costs In Transit and Unbilled Payables for the specific landed cost component. We will describe this later in the process.
Note: In case of partial deliveries the planned landed cost amounts are automatically proportionally considered based on the quantity.
After the goods receipt posting, the inventory quantity is increased, and the item net value of the material in the inbound delivery is added to the inventory value. Hence, the material unit costs are calculated by dividing the total inventory value by the quantity.
As a result, the material valuation for material LC005 shows as follows:
|Process Step||Quantity||Total Amount||Material Unit Costs|
|Before goods receipt||10 ea||1.000 USD||100 USD /ea|
|Inbound Delivery||+ 10 ea||+ 1.100 USD|
|After goods receipt||20 ea||= 2.100 USD||105 USD /ea|
The material valuation for material LC003 is calculated accordingly:
|Process Step||Quantity||Total Amount||Material Unit Costs|
|Before goods receipt||20 ea||4.000 USD||200 USD /ea|
|Inbound Delivery||+ 20 ea||+ 4.400 USD|
|After goods receipt||40 ea||= 8.400 USD||210 USD /ea|
- Supplier invoice for landed costs
The invoices for the landed costs are created without a purchase order reference (common task Supplier invoice without purchase order of the work center Supplier Invoicing).
For the item type invoice, a user can indicate that the invoice item refers to landed costs by assigning the landed cost component and a suitable product category. In the example, the freight costs of 600 USD are 100 USD higher than planned.
The button Allocate is then available. This enables a user to distribute the landed cost invoice item amount to the related inbound delivery items. More information is given in the next chapter (4).
- Note: Also, the invoice item type credit memo can be marked as landed costs and will be subject to allocation. More details on landed cost credit memo are described in the blog Landed Costs in SAP Business ByDesign – Changes related to Landed Cost Invoices.
The assigned landed cost component – or more precisely, the landed cost category it belongs to – determines the corresponding Landed Cost Purchase in Transit clearing account in the resulting journal entry.
In the journal entry, you can see the dedicated landed cost clearing set for the landed cost invoice item.
Note: There is no allocation for stock transfer inbound deliveries and Third-Party-Order-Processing inbound deliveries possible.
- Allocation of landed cost invoices to the inbound deliveries created at goods receipts
In a normal procure-to-stock process, a purchase order material item gets delivered and invoiced. The invoice item normally has a reference to the purchase order material item and also to the corresponding inbound delivery material item. This reference can then be used by the GR/IR clearing run to compare planned material costs with invoiced material costs, and to update the inventory value and thus the moving average price.
Compared with normal material invoices, a landed cost invoice does not have a reference to the material items of an inbound delivery. To allow the system to compare planned with actual (invoiced) landed costs, this connection between landed cost invoice and the corresponding inbound delivery material items has to be established first. This process is called Allocation and a new allocation document is introduced.
Allocation of landed cost invoices can be done directly from the supplier invoice with the <Allocate> Button – see above chapter (3)- or from the work center view Landed Cost Invoice Items. The work list of this view gives access to landed cost invoice items of different status, and it displays allocations that have already been created:
When you allocate the supplier invoice item, you can use the purchase order, the inbound delivery, or the inbound delivery notification to search for related inbound delivery items to which you want to distribute the landed cost invoice amount.
You can assign items from many inbound deliveries e.g. if the freight for a container covers a couple of deliveries from different material suppliers.
For the distribution, multiple distribution methods are supported:
- Distribution by material net value – this is the default
- Distribution by weight
- Distribution by volume
- Distribution by quantity – deviating units of measure are not considered
- Manual distribution by user – by entering percentages or amounts
- The inbound deliveries must be in status released
- The inbound deliveries and the landed cost invoice must belong to one company
- In the first release, the unit of measure for the weight and volume and the currency for the material net value is not considered for the distribution. This may be improved in future releases.
- Once the distribution has been manually changed, the system will not overwrite the percentage or amount of this line anymore. If all the lines were manually changed, the user must ensure that the total distributed percentage sums up to 100%.
- Non-deductible tax on landed cost invoice items will be considered for capitalization. For more details please see the miscellaneous blog.
Once the allocation document is created, in the landed cost invoice the allocation ID and the allocation status is displayed.
The landed cost invoices in status like In Process, Ready for Posting, In Approval, Posted, or Paid, can be allocated, but the release of the allocation is only possible if the invoice is posted.
At the release of the allocation document, the information is sent to financials and a journal entry will be created. The clearing set of the invoice will be split to the landed cost clearing sets of the inbound delivery items. In other words:
- The landed cost clearing set for the landed cost invoice item is cleared.
- The assigned amounts are now assigned to the landed cost clearing sets of the inbound delivery items.
- This swap happens on the same general ledger clearing account, in our example the LC Purchase in Transit (Freight).
- The landed cost clearing sets of the inbound delivery items still are in status Open and await to be set to ‘To be Cleared’.
Note: A released allocation document cannot be changed. To apply an allocation correction, the initial allocation needs to be cancelled and a new allocation document must be created. Please refer to this blog post.
- Landed cost clearing and inventory valuation update
The clearing between the planned and actual landed costs for the goods receipts (and all subsequent changes thereafter) happens by executing the landed cost clearing run. In order to consider a clearing set related to an inbound delivery item in the clearing run, it is necessary to initially set the status manually to To be Cleared. If there are further transactions concerning this landed cost clearing set/inbound delivery item after an initial clearing (such as additional allocations or a change in the inbound delivery item quantity), the clearing set status is automatically set to To be Cleared again.
The clearing process requires two steps:
(5a) Check the actual allocated amounts against the planned landed costs for each clearing set related to an inbound delivery item and for each landed cost component. Set the status to To be Cleared for all clearing sets that are still in status Open. The following typical scenarios occur:
- The actual allocated landed costs roughly match the planned landed costs
In most of these cases, the assumption is that the assigned landed costs invoices for an inbound delivery item is in the range of the expectation. Hence, the corresponding clearing set is fine for setting it to To be Cleared.
- The actual allocated landed costs significantly exceed the planned landed costs
- If this is o.k. (e.g. because you know additional costs were rightly raised) set the landed cost clearing set to To be Cleared
- Otherwise, cancel the allocation(s) that have wrongly been assigned and create corrected allocations
- The actual allocated landed costs are significantly lower than the planned landed costs
- In this case, typically you wait until you receive the missing landed cost invoices. For example, for an overseas purchase with land and ocean freight mapped into one landed cost component freight, you might have got the land freight invoice already, but you want to wait for the ocean freight invoice.
- If a significant time has passed after the goods receipt and no or little landed cost amounts have been allocated and you do not expect any additional allocations, you can set the status To be Cleared
- There were no landed costs planned, but actual allocated landed costs are posted.
More information of this special case can be found in Chapter Variant 1: Unplanned landed costs at the end of the blog.
- If your checks are o.k. set the landed cost clearing set to To be Cleared
- Otherwise cancel the allocation(s) that have wrongly been assigned and create corrected allocations
In work center Inventory Valuation, you find the report Landed Cost – Monitor and Set Clearing Status for Goods Receipts that enables the user to set the status to To be Cleared. This report facilitates identifying the above-mentioned typical situations by pre-delivered report views. In addition, the selection parameter Threshold in %: LC Actuals / Plan can be used to define customer-specific selection variants based on a threshold percentage for comparison of actual and planned landed costs. Additionally, a lot of other selection criteria are available, e. g. Inbound Delivery Item, Landed Cost Component, and Product, to personalize your decision criteria.
If the selected and displayed landed cost clearing sets meet your defined criteria, you set the status To be Cleared using an action in the report (see screen shot below). The action is available for a single landed cost clearing set or for the entire selected set. Changing the status to To be Cleared does not directly trigger the creation of journal entry but marks the landed cost clearing set to be processed in upcoming landed cost clearing runs.
For simplification, this example selects a single inbound delivery:
Important: The status To be Cleared cannot be changed anymore once it is set.
Note: This report is designed for regular monitoring of all inbound deliveries with open landed cost clearing sets. For details on how to use this report, please refer to the analytics enhancement blog.
(5b) Landed costs clearing & inventory valuation
The landed cost clearing happens by executing the Landed Cost Clearing run. The actual landed cost amounts that require clearing will update the material unit cost in case the perpetual method is moving average. In work center Inventory Valuation under Periodic Tasks, you will find the newly created task Landed Cost Clearing. Usually, this clearing run needs to be executed on company level/landed cost category level on a very regular (daily) basis that meets your business requirements.
In this example, the run has been executed for a single purchase order:
Note: Typically, in the run the data selection for Purchasing Document and Landed Cost Category is not filled. This ensures that all landed clearing sets in status To Be Cleared are processed.
Note: It is recommended to execute the clearing run daily.
As per other runs in financials, the logfile contains a summary of the postings. Furthermore, you will see all the created journal entries and you can directly navigate to the journal entries. Additionally, all the clearing sets Processed Successfully and the Processed with Errors, including Advanced Information, are displayed with necessary detailed information.
The postings of this landed cost clearing run clear the specific landed cost clearing accounts for Unbilled Payables and Purchase in Transit for the corresponding landed cost clearing categories. The differences will be posted on the corresponding inventory accounts and will again update the inventory costs of the affected materials.
This journal entry with the respective lines accomplishes the following:
- The landed cost clearing accounts are cleared for the combination of clearing set referenced to the inbound delivery item and the landed cost component. In this example for clearing set 3444-10/FREIGHT:
- 210001 – LC Unbilled Payables (Freight) 100 USD
- 130001 – LC Purchase in Transit (Freight) 120 USD
- The variance of 20 USD is cleared against Material Ledger affecting material LC005. Assuming inventory quantity is larger or equal to the landed cost clearing set quantity (goods receipt quantity, including adjustments), the inventory valuation is increased by 20 USD and thus the material unit costs are increased as well. In case that the inventory quantity is smaller, the to be cleared variance is split to the inventory valuation for the remaining quantity and to purchase price differences. The same logic is applied for the other landed cost clearing set in this example.
The impact on the inventory valuation and material unit costs is like this:
|Quantity||Total Amount||Material Unit Costs|
|LC005||20 ea||2.120 USD||106 USD /ea|
|LC003||40 ea||8.480 USD||212 USD /ea|
To analyze the landed costs, for example with regards to the composition related to a material or to improve the planned landed cost amounts, there are capabilities dedicated to a purchaser and a financial accountant. This is described in detail in the analytical enhancements blog post.
Other supported scenario variants
Variant 1: Unplanned landed costs
In this variant, there is no landed cost component planned in the purchase order and hence it is not considered during the posting of the goods receipt. The landed cost component is assigned to the landed cost invoice item as usual. It can be allocated to the inbound delivery items (that have no planned landed costs). Similar to the variant where landed costs are planned, the clearing set for the inbound delivery item without planned landed costs needs to be actively set to To be Cleared. In the next landed cost clearing run, it will be considered and will update the inventory valuation.
Variant 2: Planned landed costs – no landed cost invoice received
In this variant, landed cost components were planned in the purchase order and considered during the posting of the goods receipt. If there is no landed cost invoice received after a certain time, and also not expected later, users must set the status as to To be Cleared. In the next landed cost clearing run, it is considered and updates the inventory valuation. Assuming the stock quantity of the material exceeds or equals the landed cost clearing set quantity, the inventory valuation is decreased by the portion of planned landed costs used during goods receipt valuation. Thus, the material unit cost will decrease.
Variant 3: Inventory stock quantity was reduced before landed cost clearing run
In case the quantity in stock is less than the landed cost clearing set quantity, the landed costs will be proportionally distributed to inventory based on the quantity in stock. The remaining amount – that refers to the portion that is no longer in inventory – will be posted to price differences account.
Let’s assume that before the landed cost clearing run, a customer delivery or any consumption happened that reduced the inventory quantity so that it is less than the clearing set quantity (which is the same as the inbound delivery item quantity). For example:
- Material LC005:
- Initial stock quantity after goods receipt: 20 ea
- Remaining stock quantity after goods issue for sales 2 ea
- Clearing set quantity 10 ea
- Material LC003:
- Initial stock quantity after goods receipt: 40 ea
- Remaining stock quantity after goods issue for sales 12 ea
- Clearing set quantity 20 ea
- The invoiced landed costs are deviating from the planned landed costs:
- Material LC005: planned 100 USD, actually allocated 120 USD, resulting in a difference of 20 USD
- Material LC003: planned 400 USD, actually allocated 480 USD, resulting in a difference of 80 USD
With the clearing run, the difference between planned and invoiced landed costs will now be distributed to the available partial stock quantity and the remaining part which is not available in inventory. The latter is posted to the differences account.
Please see the journal entry below with the highlighted changes:
As a result, the material valuation for material LC005 is as follows:
|Process Step||Quantity||Total Amount||Material Unit Costs|
|After goods receipt||20 ea||2.100 USD||105 USD /ea|
|Consumption||– 18 ea||– 1.890 USD|
|After consumption||2 ea||= 210 USD||105 USD /ea|
|Landed cost clearing||0 ea||+ 4 USD|
|After clearing run||2 ea||= 214 USD||107 USD/ea|
And the material valuation for material LC003 look like this:
|Process Step||Quantity||Total Amount||Material Unit Costs|
|After goods receipt||40 ea||8.400 USD||210 USD /ea|
|Consumption||– 28 ea||– 5.880 USD|
|After consumption||12 ea||= 2.520 USD||210 USD /ea|
|Landed cost clearing||0 ea||+ 48 USD|
|After clearing run||12 ea||= 2.568 USD||214 USD/ea|
Dear Stefan Resag,
First I thank to your blogs. Really very useful to all.
In above your blog i have few query or need more clarity to myself for understanding purpose.
how to derived from land cost 120 (100+20) & 280 (200+80)
could you please elaborate those costing amount.
Thanks & Regards,
I think you mean 480 (400 + 80). The amounts can be understood as follows:
we have planned landed cost of 500 in the purchase order on header level, which get distributed to the two items based on the item net quantity. This ends up in 100 and 400 for the two items.
The invoiced landed cost amount is 600, and in the allocation document, this is distributed to the two inbound delivery items for the purchase order. This ends up in 120 and 480 for the two inbound delivery items. Now, if you compare planned with actual values in the clearing run, from the 120 invoiced, 100 are used to balance the planned value, and the remaining 20 are used to update inventory valuation for that material. Same is with 480 = 400 + 80. Hope this clarifies your question.
Thanks for your reply. Now my doubt cleared.
I have a question relating to a scenario variant not mentioned above.
This relates to a Purchase Order that includes one or more items that are zero price.
The system throws an error that reads: "Item X : Landed Cost component 'XXX' cannot be 0 or have negative value value.
Is there a possible scenario that covers this, or is there something I am missing?
Thanks in advance.
Error - Landed Cost
I only get the error message when I enter a negative landed cost value. What is the use case here? Or can you provide me with the detailed steps on how to reproduce the error message?
Thanks for your reply.
To replicate the error message, kindly follow the below steps:
Thanks in advance.
thanks for your quick response. I am now able to reproduce now. As far as I can see you do not want to have any landed costs assigned to the zero price item, correct?
Yes, I do not want the landed costs assigned to the zero price item.
I have talked to development. We currently think that this is a bug. Can you please create an incident with a detailed description of the steps on how to reproduce the issue. Can you please also mention that this was already pre-discussed with me and development, so that support hands over the incident to development.
Thanks a lot and best regards,
Thanks for your help.
I had already created an incident - however, there has been no progress.
I will respond to the incident indicating I have had a discussion with you and development.
Have a great day ahead.